Fitch Rates $40.3MM Birdville ISD, TX GO Bonds 'AAA'; 'AA' Underlying.

AUSTIN, Texas -- Fitch Ratings assigns an 'AAA' rating to $40.3 million of Birdville Independent School District (the district), TX's unlimited tax school building bonds, series 2006, based on a guaranty provided by the Texas Permanent School Fund (PSF), whose financial strength is rated 'AAA' by Fitch. Fitch has also assigned its 'AA' underlying rating to the series 2006 bonds. Additionally, Fitch has affirmed the underlying 'AA' rating on the district's $140.3 million in outstanding unlimited tax bonds. The bonds will be sold on a negotiated basis to a syndicate led by UBS Investment Bank on Jan. 25. The Rating Outlook is Stable.

The bonds are direct obligations of the district payable from ad valorem taxes levied annually, without limitation as to rate or amount, on all taxable property. Bond proceeds will be used to upgrade campus heating, ventilation, and air conditioning systems and purchase computers and install related technology infrastructure.

The 'AA' underlying rating reflects the district's strong financial position, above average principal amortization, manageable student enrollment increases, and the health of the service area economy. District finances have been a stellar feature of this credit, demonstrating significant unreserved general fund ending balances and sizeable cash positions. Although the district is near full maturity, the district is facing notable capital needs to relieve overcrowding at the elementary and high school levels and renovate its older facilities. Voters recently rejected most of the district's fall 2005 bond propositions due to campus consolidation concerns, but a revised program is expected to be put to the voters within the next 12 months. At an estimated $75 million-$100 million, the anticipated bond package is substantial, but its impact will be manageable given the district's existing debt service capacity resulting from its rapid principal pay out rate.

The district is located in Tarrant County, next to the City of Fort Worth and between Dallas/Fort Worth International Airport and Alliance Airport. It is the third largest school district in Tarrant County, with more than 22,000 students. The district's service area includes the cities of North Richland Hills, Haltom City, Richland Hills, and Watauga, as well as a portion of the City of Hurst. The median effective buying income in the Fort Worth/Arlington primary metropolitan statistical area is above state and national norms. The district's tax base has demonstrated solid growth, with a compound annual average growth of almost 7% since fiscal 1999. As a bedroom community for the greater metro area, the tax base is primarily residential. District build-out is anticipated to occur in about five years. Recent enrollment increases have been modest, averaging 1% annually for the past five years.

The district's financial performance has been strong with general fund unreserved fund balances of 22%-28% of expenditures and transfers out since fiscal 2001, including an annual $12.5 million designation for budget contingencies since fiscal 2003. Most recently, fiscal 2005 posted a $1.1 million operating surplus, increasing the unreserved fund balance to almost 28%, in line with the board's policy of 20%. Due to rising taxable assessed valuations (TAV) and modest enrollment growth, the composition of the district's general fund revenues has shifted towards greater dependency on local sources, totaling 69% in fiscal 2005, up from 57% in fiscal 2001. The fiscal 2006 budget is expected to draw down general fund reserves by $3 million, due in part to one-time capital outlays and higher utility costs. The budget is based on a level operating levy of $1.465 per $100 TAV, making the district somewhat unique for its remaining taxing margin below the $1.50 maximum allowed by state law. It also includes modest teacher pay raises equal to 3%, enabling it to maintain the state's highest starting salary of over $40,000. The budget revenue projections are based on conservative assumptions of flat average daily attendance.

Including the current offering, the district's direct debt burden is manageable at over $1,100 per capita and 2.5% of TAV. The inclusion of overlapping debt increases the overall debt burden to a manageable $2,270 per capita and 4.6% of TAV. The principal pay out rate is above average at 68% in ten years, including the accreted values of outstanding capital appreciation bonds.

In September 2005, voters approved only one of the district's three bond propositions. Community opposition was said to focus on the district's planned consolidation of six smaller elementary schools into the larger proposed facilities for cost efficiency purposes. A revised bond program is expected to be offered to voters within the next 12 months in the approximate amount of $75 million-$100 million, an increase of 50%-67% in district debt. A phased approach combined with the district's existing descending debt service schedule (after fiscal 2013) should enable the future bond program's impact to be modest in terms of tax rate increases.

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